Anything for a Buck: Jim Letourneau Looks to Canadian Biotech for Opportunity

Source: Daniel Levy of The Life Sciences Report (1/17/13)

To avoid some of the "dysfunctional excess" of the energy and mining sectors, Jim Letourneau, self-described contrarian and founder and editor of the Big Picture Speculator, turns to investing in biotech. His focus is on Canadian companies, which he believes perform on a par with companies in the United States. In this interview with The Life Sciences Report, Letourneau describes what he looks for in a biotech investment and names some of his favorite companies.

The Life Sciences Report: You are known to a lot of readers as an energy investor, and biotech will be viewed as new for you. What attracted you to biotech?

Jim Letourneau: Biotech is not really new for me. It's just something I haven't talked about before.

I have two mottos for investing. The first is "there's always a bull market in something." The second is "anything for a buck." In 2012 it was easier to make money in small-cap biotech companies than it was in any other sector. I like new technologies in general, and some biotech companies have solid, proven technologies with a lot of upside. From a simpler perspective, there were only 114 life science companies listed on Canadian exchanges as of Oct. 31, 2012, compared to 1,672 in mining and 398 in energy. Biotech is a smaller space. It hasn't been overpromoted, and most analysts would probably agree that the mining and energy sectors have reached a state of dysfunctional excess. I'm pretty excited about biotech.

TLSR: I find it interesting that you think it's easier to make money in biotech when many investors are fleeing this market.

JL: Well, it's certainly risky. If new biotechnologies were proven, they'd be worth a lot more money. There's risk because these technologies must be partnered or proven through clinical trials. There are a lot of steps: The science often has been developed in a lab or at a university for 5–10 years before being put forward by a public company. But biotech companies are generally of a high quality, with credible management teams and strong technical people. Investors have a pretty good shot with biotech companies.

TLSR: There are trends today in biopharma that push investments away from research and toward development. Do you have any thoughts in this area?

JL: It's a real chicken-and-egg problem. Big pharmas have patent expirations to deal with. To compensate, existing compounds are being tested for other uses. However, to develop something really revolutionary, companies have to do basic research and development (R&D). That's where the real upside is.

"I have two mottos for investing. The first is 'there's always a bull market in something.' The second is 'anything for a buck.'"

Unfortunately, new ideas that have the potential to succeed must be exceptional to avoid being killed. Many things can come into play to kill innovation. At the end of the day, basic R&D makes a huge difference and there's no substitute for it.

TLSR: Regarding basic research, how do you feel about current pressure to utilize the academic sector?

JL: There are pros and cons. Academic research institutions have access to state-of-the-art equipment and resources that public companies utilize. On the other side, there are questions about how programs in academic institutions get funded. Regardless, it's been a common theme throughout the industry to outsource basic research to academia, the intention being that if anything interesting comes along, industry will scoop it up. There's nothing wrong with that model. The real issue is intellectual property. You can't expect to have publicly funded research remain confidential. This is very different if technology is developed in-house.

TLSR: Let's talk about some of your specific interests. You cover Canadian small-cap life science companies. Can you provide insight regarding their overall performance compared to the life sciences sector in general?

JL: I am not aware of a life sciences index composed of only Canadian companies. It's actually bullish news that there isn't one, and that you can't buy Canadian life science iShares yet. It means the sector hasn't gotten a lot of attention. To compare these companies, you have to look at average prices. Many of the companies have catalysts, such as clinical trial results, partnership agreements and approvals that cause valuations to dramatically jump up and down. Broadly, the Bloomberg S&P Smallcap Life Sciences Industry Index is up 29% on the year, and I think Canadian life science small-cap stocks are on par with that.

TLSR: Things are pretty equal between the Canadian markets and the U.S. markets?

JL: Yes, in terms of percentage increases. However, the argument could be made that there is an overall valuation difference. For example, a company that is only listed in Canada is probably going to be valued less than one that is listed in the U.S.

TLSR: Since we're talking about performance of healthcare stocks in North America, there are some pressures in the United States that could impact this sector across the board. How do you think new healthcare legislation (the Patient Protection and Affordable Care Act, also known as Obamacare) in the United States will impact the life sciences sector?

JL: If a pharmaceutical company receives a new drug approval from the U.S. Food and Drug Administration (FDA), it will find a way to get paid. If the drug only treats 500 people, the company may charge $100,000 ($100K) to $300K or more per year for the treatment. However, due to the aging population, there are huge health issues affecting North America. That's the bullish side. There is uncertainty around healthcare and what President Obama is going to do, and this could be seen as a negative. Ultimately I think people are willing to spend the money to stay alive ahead of almost anything else, including prevailing healthcare policy.

JL: I think investors who are paying attention to biotech in Canada are thrilled. It shows that big pharma is willing to make acquisitions of Canadian companies. Communication about—and awareness of—Canadian companies and their programs is higher than it has ever been. Even so, it's still possible for Canadian biotechs to be undiscovered. This transaction helps put Canadian biotechnology on the map.

TLSR: It's always fun when these types of marriages take place and bring more attention to specific sectors.

JL: Yes. It shows that "this could happen to you."

TLSR: The trick seems to be in positioning a company to become the "you" that this could happen to.

JL: Even from a basic starting point, a Canadian biotech company's odds are better. Finding one star in 114 biotechs is easier than finding the one in 1,672 mining companies. In practice, it's simply easier to learn about 100 companies than it is to learn about 1,000 companies.

TLSR: Regarding specific companies, you cover a number of oncology firms. Do you see oncology as a growth area in 2013? What are some of the companies that will benefit from catalysts in the near future?

JL: A good example of a company with good prospects in 2013 is Oncolytics Biotech Inc. (ONCY:NASDAQ; ONC:TSX). This company has had some positive phase 3 data in head-and-neck cancer, resulting in a nice bump up in its share price. Oncolytics has been around for a very long time and it has had lots of ups and downs, but when it announced its data, the company went from under $2.25 to over $3.50. This was a very big move and it took the phase 3 data to make it happen.

Overall, timing in biotech is difficult. Clinical trials always seem to take longer than anticipated, and sometimes the resulting data doesn't show exactly what a company was hoping. Oncolytics is an example of what can happen if a company is in the right place at the right time.

TLSR: What about other types of cancers, such as lung cancer?

JL: I've been following a medical device company called Verisante Technology Inc. (VRS:TSX.V). Its main platform is identifying skin cancer. Skin cancer is fairly difficult for even well-trained dermatologists to visually detect. They can see moles that look suspicious, but that doesn't tell them whether they're cancerous or not. Conclusive diagnoses require biopsies. Verisante has a technology that uses Raman spectroscopy to get compositional data that indicates whether a mole is cancerous or not. Other technologies use pattern recognitions from millions of images of moles. Such methods don't utilize compositional data and, consequently, don't work very well.

"Investors have a pretty good shot with biotech companies."

While Verisante has a long road to commercialization, I think dermatologists will be open to using this tool because it's a fast and efficient way to screen. The exciting part is that Verisante's technology doesn't just work on skin cancer. Strong data from a 2011 pilot study and a 2012 follow-up have led to the company working on applications for regulatory approval. Overall, Verisante's platform is very compelling. The technology behind the Verisante Core for lung cancer detection was also named a top 10 cancer breakthrough of 2011 by the Canadian Cancer Society.

TLSR: It is well established that quick and accurate detection of any cancerous lesion is advantageous. The earlier the detection, the better the chances for effective treatment.

JL: Yes. Also, if the cost is lower, patients and doctors are going to be more open to tests leading to earlier diagnoses. There are a lot of positives. What I'm learning over time is how long it takes for great ideas to become commercialized.

TLSR: Still, approval of diagnostic technologies is much quicker than full-fledged development of drugs.

JL: That's true. Investors are normally quite impatient. I'm quite impatient myself as a general rule. You've only got so much time in a year, and at the end of the year you want to be farther ahead than you were at the beginning. In Canadian biotech, share prices can be all over the place depending on the general market, the mood of investors and whether expectations were realistic or not. Sometimes investors get a really nice opportunity, where the share price has been beaten down and nothing has gone wrong with the science. Companies sometimes simply fall out of favor with the market, and these can be picked up for pretty good prices. That's my favorite time to buy companies—when everybody hates them but there is nothing fundamentally wrong with the science or technology.

TLSR: Would you consider your strategies to be contrarian compared to the overall mood of the market?

JL: More and more every year. If there's a company that I've followed for a long time and really understand, I get intrigued when I see the price get lower. I was not like that in the past. If I have a big position, sometimes I still get nervous. But, yes, I would say I'm more contrarian than I used to be.

TLSR: Let's get back to companies that you like. I know that you also cover companies in the cardiovascular space. What do you like there?

JL: I am excited about Acasti Pharma Inc. (APO:TSX), which is a spinout from Neptune Technologies & Bioressources (NTB:TSX; NEPT:NASDAQ). Neptune sells krill oil. Krill are shrimplike creatures that whales eat. Acasti is conducting human trials that, if successful, will allow it to use krill oil derivatives as a drug for cardio-metabolic disorders including cholesterol management. Similar companies with approved drugs that reduce triglycerides are typically valued in excess of a billion dollars. For example, Amarin Corp. (AMRN:NASDAQ) is just starting to commercialize a fish oil drug called Vascepa and its market cap is $1.3 billion ($1.3B). Amarin's share price is bouncing around because of questions regarding the strength of its patents. Furthermore, people are questioning the value of taking fish oil because while it may move cholesterol numbers around, it's not necessarily extending human lifespans. But, at the end of the day, it's pretty easy for Acasti to target a billion-dollar-plus market cap based on early data indicating that krill oil is at least as good as fish oil in treating hypertriglyceridemia. Nothing is risk-free, but I think Acasti's got something that should be at least as good as what Amarin's doing with Vascepa.

TLSR: Acasti's formulation is going to be a pharmaceutical, not a dietary supplement, correct?

JL: You can already buy krill oil as a dietary supplement. Acasti is trying to "pharmaceuticalize" krill oil and has phase 2 trials underway. Acasti has released some promising data and is working on shoring up its patent position.

JL: Cost does matter. Right now Acasti is not talking about that, but I think krill oil will actually be more efficacious than fish oil.

TLSR: Let's move on to another company.

JL:Resverlogix Corp. (RVX:TSX) is developing RVX-208 as a first-in-class small molecule inhibitor of BET bromodomains for the clinical reversal of atherosclerosis. This company has had a long ride. In early 2007 the share price was almost $30. A few years later, when I learned about this stock, I found it trading in the $2–3 per share range. I saw Resverlogix as a great opportunity. Nothing had gone wrong with its science—what had gone wrong was the expectation that it would be an acquisition target. When that did not happen, the company needed to raise money, and investors lost patience. Since I started following this stock, I've seen the share price bounce from $3 to $7.50, and back down.

"My favorite time to buy companies is when everybody hates them but there is nothing fundamentally wrong with the science or technology."

Currently, RVX-208 is being evaluated in phase 2 clinical trials. The therapy acts by stimulating gene transcription of ApoA-1 via an epigenetic mechanism. ApoA-1 has been documented to trigger atherosclerotic plaque regression by increasing functional high-density lipoproteins. The clinical trials are monitored using ultrasound to measure changes in arterial diameter and arterial wall thickness. That's the main story that got me interested in this company. The exciting thing is that these BET inhibitors are relevant to cancer and diabetes, in addition to cardiovascular disease. This is a hot field.

TLSR: It is also very new. Control over the machinery behind cancer and other diseases has been very difficult to tackle. It seems much easier to go after specific cancer-related enzymes.

JL: Yes, it is new. You know you have something really interesting when you have positive data and not too many comparables. Resverlogix is busily patenting its science to build an intellectual property fence around the proteins it has been working on.

TLSR: One of the things that I find very frustrating in biotech is that if a number of companies are working on similar targets and they all fail, the one company that has a chance to succeed will never get funded.

JL: That is true. Resverlogix is suffering a bit from that. The big failure of Pfizer's torcetrapib in 2006, after an outlay of ~$800 million ($800M), created a "nuclear winter" for cholesterol drugs. It's the herd approach. Money tends to move away from research in certain areas at the worst possible times. In practice, the best time to find out what might have a chance of working is after some failures have demonstrated what doesn't work.

TLSR: Let's talk about another therapeutic area. Can you tell me about a company in the central nervous system (CNS) space?

JL: I follow a company called biOasis Technologies Inc. (BTI:TSX.V), which has a $63M market cap. The company's programs came out of research at the University of British Columbia with a protein called p97. This protein moves across the blood-brain barrier easily. To capitalize on this, biOasis is working to conjugate drugs to the p97 protein.

So far all of the data comes from mouse studies, but that has been enough to get big pharma interested. The company has announced research collaborations with Shire Plc (SHPGY:NASDAQ; SHP:LSE), Abbott Laboratories (ABT:NYSE), MedImmune, which is owned by AstraZeneca Plc (AZN:NYSE), and with a Belgian company named UCB S.A. (UCB:BSE). BiOasis is trying to create as much competitive tension as possible between the different pharmaceutical companies while, at the same time, trying to optimize its technology. It will be interesting to see how this plays out. Will a major pharmaceutical company try to buy biOasis because it is easier to own the whole company? Or will the company enter into a bunch of licensing agreements?

TLSR: You didn't mention the therapeutic indications. CNS is a very broad area.

JL: That's because I'm a big picture guy. One example involves Herceptin (trastuzumab), marketed by Roche Holding AG (RHHBY:OTCQX), to treat HER2-positive breast cancer. BiOasis has had good results showing that when Herceptin is conjugated with p97, it gets into the brain. Apparently that type of breast cancer spreads to the brain fairly quickly, so there's some excitement around the observations that, in mouse models, the Herceptin conjugate gets into the brain.

TLSR: I noticed you have an interest in technologies that support the sterilization of surgical instruments.

JL: Yes. When I first heard about TSO3 Inc. (PINK:TSTIF), I was very impressed. The company is producing a sterilizer that utilizes hydrogen peroxide and ozone. The technology is faster and cheaper than traditional sterilization methods and has all kinds of applications. The company's share price is suffering right now because of a terminated agreement with 3M (MMM:NYSE), which was contingent upon FDA approval in a set timeframe, coupled with delays in getting FDA approval. The company recently announced that a simplified submission using one sterilization cycle instead of three (while increasing the claims and utility of that one cycle) to accommodate all but a few instruments will be submitted by late January or early February.

TLSR: How does this technology compare to the use of autoclaves?

JL: The TSO3 technology operates at lower temperatures compared to autoclaves. This is important because many of the new surgical tools used in minimally invasive surgeries incorporate cameras and other types of electronics, and temperature-sensitive materials are used in their designs. This generates a need for effective but milder sterilization methods. It's not like blasting a scalpel with hot steam.

"Ultimately I think people are willing to spend the money to stay alive ahead of almost anything else, including prevailing healthcare policy."

The TSO3 instrument provides pretty high throughput and operates at a lower cost per instrument sterilized. That's the selling point. It is already used in Canadian and European hospitals, and they're not having too many problems with it. The overhang is the perception that if the product is not used in the U.S., then maybe there is something wrong with it. That is not the case. I think the technology is fine, and it's just a matter of convincing the FDA.

TSO3 started the year at about $1.65 per share and now it's down to about $0.90. I'm excited by that. I own only a little bit at the higher price, and I would happily buy it at today's price because there is no indication that the FDA isn't going to approve the technology. At the end of the day the technology works and only market expectations and regulatory delays are causing the share price to drop.

TLSR: Again, we're back to the lack of patience most investors have in getting their returns.

JL: Exactly. It is important to remember that if the science and if the technology are proven to work, there is a lot of upside to these companies. If they can make it through all of the hurdles, then they are worth a lot more than their current market caps. That's why I like these types of companies.

TLSR: Do you have any final thoughts?

JL: Canadian life sciences companies, without question, are overlooked. I think a lot of value will be created in these companies over the next few years. This is largely because not very many people have been paying attention to this market. That is actually a bullish sign.

TLSR: Jim, I've enjoyed talking with you. Thank you so much for your time.

JL: Take care.

Jim Letourneau is the founder and editor of the Big Picture Speculator and is a professional registered geologist living in Calgary, Alberta. He has more than twenty years' experience in the oil and gas sector.

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DISCLOSURE:
1) Daniel Levy of The Life Sciences Report conducted this interview. He personally and/or his family do not own shares of any of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Oncolytics Biotech Inc., Resverlogix Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Jim Letourneau: I personally and/or my family own shares of the following companies mentioned in this interview: Acasti Pharma, Neptune Technologies and Bioressources, TSO3, Verisante Technology Inc., biOasis Technologies Inc. and Resverlogix Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

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